By Reshma Kapadia

Given the strong inflows into emerging market bonds, the obvious question is if it’s time to look elsewhere. But as capital leaves Europe and interest rates in much of the developed world linger near historic lows and appear headed lower, strategists and fund managers say the opportunity will likely continue.

Initially, at least part of the interest in emerging market bonds, was a desire to diversify away from the dollar. As a result, local-denominated funds saw strong inflows. But with several emerging market currencies seeing bouts of volatility (the real, the rupee), strategists say there has been more interest in USD-denominated debt as a way to capture better yields. So far this year, $12.1 billion has poured into emerging market dollar-denominated funds and just $3.3 billion into local debt funds, according to Lipper.

Anthony Michael, head of fixed income for Aberdeen’s Asia Pacific desk, still sees value in soverign bonds in Indonesia, India and the Philippines even with the recent inflows into these markets, largely because these are higher-yielding markets. Michael says about 35% of the $19 billion Aberdeen Asia Pacific Income Fund(FAX) is in Asian dollar-denominated credit. (A large chunk sits in Australia). He also sees value in Indian bonds but says the country’s policy issues are weighing on the rupee, which creates a headwind.

Robert Arnott, chairman of Research Affiliates and manager of the popular Pimco All Asset fund (PASAX), in a recent Morningstar video said that there has been a lot of talk about emerging market bond, but the inflows don’t match the talk. With emerging market countries offering seven times the debt coverage of developed market G5 countries while paying 3-4% higher yields, Arnott says they are interesting on multiple fronts, calling them the closest thing to “low hanging fruit.”

The Emerging Markets Traders Association (EMTA) quarterly survey reports a 17% decline in emerging market debt trading volume in the second quarter from a year-ago, but activity was up in Brazil, Mexico and Russia, Bank of America Merrill Lynch noted in a research report this week.

Brazilian bonds were the most frequently traded local debt, at $246bn, followed by Mexico at $216bn and Russia $69bn.

WisdomTree Emerging Markets Local Debt(ELD), one of the most popular ways investors play emerging market bonds, is up 7.6% this year and pays more than 3% in yield.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.